Is RongFa Nuclear Equipment (SZSE:002366) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies RongFa Nuclear Equipment Co., Ltd. (SZSE:002366) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for RongFa Nuclear Equipment

How Much Debt Does RongFa Nuclear Equipment Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 RongFa Nuclear Equipment had CN¥1.55b of debt, an increase on CN¥136.8m, over one year. However, it also had CN¥1.42b in cash, and so its net debt is CN¥123.1m.

How Strong Is RongFa Nuclear Equipment's Balance Sheet?

We can see from the most recent balance sheet that RongFa Nuclear Equipment had liabilities of CN¥1.11b falling due within a year, and liabilities of CN¥1.88b due beyond that. Offsetting these obligations, it had cash of CN¥1.42b as well as receivables valued at CN¥1.44b due within 12 months. So it has liabilities totalling CN¥122.6m more than its cash and near-term receivables, combined.

Having regard to RongFa Nuclear Equipment's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.78b company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since RongFa Nuclear Equipment will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year RongFa Nuclear Equipment wasn't profitable at an EBIT level, but managed to grow its revenue by 55%, to CN¥919m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though RongFa Nuclear Equipment managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥52m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥1.1b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for RongFa Nuclear Equipment (1 is significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.